I know someone who was recently asked to co-sign a hefty loan by a family member. I don't know what I'd do if I was put in the same position as the one asked. What are the risks? What are things to consider? Would you recommend co-signing, and under which circumstances?

"Before you loan friends and family money, ask yourself which you need more."
– fennecJun 1 '10 at 15:09

2

Most answers to this question seem to be quite US-focussed. Impact on my credit score? I don't have a credit score. And the lack of a nation-wide credit score means that banks have a harder problem establishing creditworthiness, something that's significantly alleviated by co-signing. The co-signer is first on the hook and so his co-signing is not just a financial backup for the bank but also a statement of trust.
– MSaltersAug 21 '14 at 22:24

6

Another way to think of it: Cosigning is not very different, from a risk point of view, from your borrowing the money and then lending it to them for the same interest rate. If you wouldn't do that, don't co-sign.
– keshlamJun 21 '16 at 16:39

1

@fennec If I understand your comment correctly, then I really disagree with the sentiment. It's a false dichotomy. If a friend asks to borrow $1000 and I say no because I need the money to pay my own bills, you seem to imply that that friendship is inevitably destroyed. If a friend ends his/her relationship with you because you won't loan him/her money, then it likely wasn't a legitimate friendship to begin with.
– arbitrarystringoflettersOct 3 '16 at 12:48

@arbitrarystringofletters I think you misunderstood fennec's point. The friendship destroying part starts when they default on the load, leaving you on the hook.
– CodesInChaosOct 4 '16 at 15:19

5 Answers
5

My thoughts on loaning money to friends or family are outlined pretty extensively here, but cosigning on a loan is a different matter. It is almost never a good idea to do this (I say "almost" only because I dislike absolutes). Here are the reasons why:

If the borrower doesn't pay the loan, you are on the hook for the loan.

If you can't won't/pay it in such a case as (1), it your credit score will be trashed.

If they default on the loan and the asset they bought doesn't cover the loan balance, your own assets could be in danger (this could mean garnished wages, property liens, lawsuits or other legal trouble)

When you apply for other loans of your own, this loan will apply to your debt/income ratio, and apply to your credit score, possibly negatively effecting your ability to borrow in the future

If they default on the loan, not only will you be mad at them for not holding up their end of the agreement, they may be mad at you for not taking over payments for them.

If they need a co-borrower, it means the bank thinks that they are not a good loan risk, and by their calculations they won't be able to pay back the loan. Usually when someone is unable to pay a loan, it isn't for lack of trying. Thus, your knowing their good character probably counts for little when the chips are down. If the bank thinks the math won't work out, it probably won't and you will be the one left to pick up the pieces.

Now, all that said, if my sister or parents were dying of cancer and cosigning a loan was the only way to cure them, I might consider cosigning on a loan with them, if that was the only option. But, I would bet that 99.9% of such cases are not so dire, and your would-be co-borrower will survive with out the co-signing.

My personal rule is to not loan money (or co-sign) for any amount that I am not willing to give away. It can go wrong in so many ways, and having a family or friend involved means making a "business" decision is difficult.

If a bank won't loan the person the money, why should I? Being a co-signer is the same as borrowing the money in my name and giving it right over to the borrower.

There might be great reasons to do it. I would probably sign a loan to keep my family alive or healthy, but no other reason. There are many ways to help without signing a loan. Give a room and a place to live, loan a car.

The other thing is if you really truly believe in the borrower, it won't do long term damage to your credit or your financial goals, and you are the only resort; go ahead. I am thinking about helping a teenager afford their first car or student loans.

Yes, there are times when co-signing is the right choice. One is when you know more about the person than the loan issuer does.

Consider a young person who has just started working in a volatile field, the kind of job where you can be told on Friday that you only get one shift next week but things might pick up the week after, and who makes maybe $12 an hour in that job. You've done the math and with 40 hour weeks they can easily afford the loan. Furthermore, you know this person well and you know that after a few weeks of not enough shifts, they've got the gumption to go out and find a second job or a different job that will give them 40 hours or more a week. And you know that they have some savings they could use to ensure that no payments will be missed even on low-wage weeks. You can cosign for this person, say for a car loan to get them a car they can drive to that job, knowing that they aren't going to walk away and just stop making the payments. The loan issuer doesn't know any of that.

Or consider a young person with poor credit but good income who has recently decided to get smart about money, has written out a budget and a plan to rehabilitate their credit, and who you know will work passionately to make every payment and get the credit score up to a place where they can buy a house or whatever their goal is. Again, you can cosign for this person to make that happen, because you know something the lender doesn't.

Or consider a middle aged person who's had some very hard knocks: laid off in a plant closing perhaps, marriage failure, lost all their house equity when the market collapsed, that sort of thing. They have a chance to start over again somewhere else and you have a chance to help. Again you know this isn't someone who is going to mismanage their money and walk away from the payments and leave you holding the bag.

If you would give the person the money anyway (say, a car for your newly graduated child) then cosigning instead gives them more of a sense of accomplishment, since they paid for it, and gives them a great credit rating too. If you would not give the person the entire loan amount, but would make their payments for many months or even a year (say, your brother's mortgage for the house where he lives with a sick wife and 3 small children), then cosigning is only making official what you would have done anyway.

Arrange with the borrower that if they can't make their payments any more, you will backstop them AND the item (car, house, whatever) is going up for sale to cover your losses. If you don't think you could enforce that just from the strength of the relationship, reconsider co-signing. Then sign what you need to sign and step away from it. It's their loan, not yours. You want them to pay it and to manage it and to leave you out of it until it's all paid off and they thank you for your help. If things go south, you will have to pay, and it may take a while for you to sell the item or otherwise stop the paying, so you do need to be very confident that the borrower is going to make every single payment on time. My point is just that you can have that confidence, based on personal knowledge of character, employment situation, savings and other resources, in a way that a lender really cannot.

Please read this again: "If they need a co-borrower, it means the bank thinks that they are not a good loan risk, and by their calculations they won't be able to pay back the loan." That means that you will have to repay the loan or suffer damage to your credit score.
– chili555Aug 20 '14 at 0:11

3

I disagree, and the 5 paragraphs above say why. It is possible for me to know more than the bank about some particular borrowers, and therefore make a decision the bank would not make.
– Kate GregoryAug 20 '14 at 0:46

6

I foolishly graduated without getting into debt; I had no credit history. Despite having full time work at a reliable company and ~30K in a savings account, I couldn't get time-of-day from a bank, much less a credit card. No one was willing to take the first chance. My father co-signed; I now have a stellar credit rating. The banks were wrong. If you know better than the bank, why not take the mild risk that they won't?
– TrevelDec 15 '15 at 16:15

@Trevel: I respectfully would say that you were foolish to start off borrowing money when you had reliable income and great savings to fund purchases.
– AbraCadaverOct 4 '16 at 20:02

1

@AbraCadaver That's all well and good but what I was after was a house, and I wasn't paid THAT well. Plus it's nice to be able to order things from Amazon.
– TrevelOct 4 '16 at 20:51

Never co-sign a loan for someone, especially family
Taking out a loan for yourself is bad enough, but co-signing a loan is just plain stupid. Think about it, if the bank is asking for a co-signer its because they are not very confident that the applicant is going to be paying back the loan. So why would you then step up and say I'll pay back the loan if they don't, make me a co-signer please. Here is a list of things that people never think about when they cosign a loan for somebody.

The loan now shows up on the cosigners credit.

The entire credit history will now be showing up on the cosigners credit. That means that if you the cosigner had excellent credit your whole life, but the person you co-signed for just missed their payment and is now late, your credit is now ruined along with theirs.

I hope you didn't need to do any financing or refinancing for yourself in the meantime. Now because this loan is now showing up on your credit, the payment due will now be calculated into your debt to income ratio, and you can tell your lender until your blue in the face that the payment is not yours, but you'll be wasting your time.

If you make 3000 a month and you cosigned a loan for 300 dollars a month, that's now 10 percent of your debt to income ratio. In an industry where your DTI should not be over 36% that's one heck of a loan you should never have cosigned for. So yes it can interfere with your capability to get approved for a loan or get approved for as much as you might of needed.

Last but least, never mix family and friends with money, when things go sour it can get pretty ugly and you can end up ruining some relationships that could have been great for the rest of your life.

Now if you absolutely must co-sign a loan here is how I would do it. I, the co-signer would be the one who makes the payments to ensure that the loan was paid on time and I would be the one collecting the payment from the person who is getting the loan. Its a very simple way of preventing some of the worst situations that can arise and you should be willing to make the payments anyway after all thats what it means to cosign a loan. Your just turning things around and paying the loan upfront instead of paying after the applicant defaults and ruins every ones credit.

I know this question has a lot of answers already, but I feel the answers are phrased either strongly against, or mildly for, co-signing.

What it amounts down to is that this is a personal choice. You cannot receive reliable information as to whether or not co-signing this loan is a good move due to lack of information. The person involved is going to know the person they would be co-signing for, and the people on this site will only have their own personal preferences of experiences to draw from. You know if they are reliable, if they will be able to pay off the loan without need for the banks to come after you.

This site can offer general theories, but I think it should be kept in mind that this is wholly a personal decision for the person involved, and them alone to make based on the facts that they know and we do not.

Thank you for your interest in this question.
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